Chapter 7: Relief for SMEs and large companies: vaccine research etc
Overview
2825.This Chapter provides relief for research into certain vaccines and medicines. It is based on Schedule 13 to FA 2002.
2826.The Chapter applies only to expenditure incurred on or after 22 April 2003. See paragraph 28(1) of Schedule 13 to FA 2002. Schedule 2 (transitionals and savings) preserves this commencement rule (which, for the purposes of this Act, is relevant only to pre-trading expenditure).
Section 1085: Overview of Chapter
2827.This section describes the contents of the Chapter. It is new.
Section 1086: Meaning of “qualifying R&D activity”
2828.This section defines “qualifying R&D activity” for the purposes of the relief available for vaccine research. It is based on paragraph 4 of Schedule 13 to FA 2002.
2829.The relief is intended to encourage research into vaccines that protect against diseases that are particularly prevalent in the developing world. This is reflected in the scope of subsections (1) and (2). A clade is a type of genetic grouping. Subsection (2) limits relief to research into the varieties of HIV that are most common in the developing world.
Section 1087: Deduction in calculating profits of trade
2830.This section allows the company to claim relief as a trade deduction for qualifying expenditure on vaccine research. It is based on paragraphs 14 and 21 of Schedule 13 to FA 2002.
2831.The section combines the qualifying conditions that apply to small or medium-sized enterprises in paragraph 14 and to large companies in paragraph 21 of Schedule 13 to FA 2002. The amount of the relief is then given separately for each type of company in the following sections. Also, section 1092 allows a small or medium-sized enterprise to elect to create a trade loss in respect of pre-trading expenditure.
2832.This section makes clear that relief is given only to companies liable to corporation tax. See Change 77 in Annex 1 and the commentary on section 1039 (overview of Part).
Section 1088: Large companies: declaration about effect of relief
2833.This section requires that a claim for relief under section 1087 be accompanied by a declaration. It is based on paragraph 21 of Schedule 13 to FA 2002.
Section 1089: SMEs: amount of deduction
2834.This section gives the amount of the deduction if a small or medium-sized enterprise claims relief as a trade deduction. It is based on paragraph 14 of Schedule 13 to FA 2002.
2835.The normal operation of section 61 in Part 3 is suspended when allocating qualifying expenditure to an accounting period (see section 1099(2)). Pre-trading expenditure is allocated to periods of account in accordance with generally accepted accounting practice and is not treated as incurred when the company starts to trade.
2836.The company may be carrying on one trade and incur pre-trading expenditure in respect of another activity. Subsections (5) and (6) make clear that relief can be claimed on the pre-trading activity and given as a deduction in calculating the profits of the existing trade. This follows from paragraph 14(1)(b) of Schedule 13 to FA 2002, which requires only that the company be carrying on a trade. There is no requirement that the relief is given in calculating the profits of the trade for which the relief is given.
Section 1090: Modification of section 1089 for larger SMEs
2837.This section modifies section 1089. It is based on paragraphs 13, 14 and 15A of Schedule 13.
2838.The purpose of this modification is to keep the deduction in section 1089 within the European Union limit on state aid. “Larger SME” is defined in section 1121. Schedule 2 (transitionals and savings) disapplies the “larger SME” category of company in relation to expenditure incurred before 1 August 2008. This preserves the commencement rule in section 50(7) of FA 2007.
Section 1091: Large companies: amount of deduction
2839.This section gives the amount of the deduction if a large company claims relief as a trade deduction. It is based on paragraph 21 of Schedule 13 to FA 2002.
Section 1092: SMEs: deemed trading loss for pre-trading expenditure
2840.This section allows a small or medium-sized enterprise to claim immediate relief for qualifying expenditure incurred in a pre-trading period. It is based on paragraph 15 of Schedule 13 to FA 2002.
2841.The section is very similar to section 1045. A small or medium-sized enterprise can elect to create a trading loss in respect of pre-trading expenditure that qualifies for relief under this Chapter.
2842.Section 1099(1)(b) has an important role to play in the operation of this section. It determines how pre-trading expenditure is allocated to accounting periods. This determines whether the threshold test in subsection (3) is met and the amount on which relief is given.
2843.This section makes clear that relief is given only to companies liable to corporation tax. See Change 77 in Annex 1 and the commentary on section 1039 (overview of Part).
Section 1093: Modification of section 1092 for larger SMEs
2844.This section modifies section 1092. It is based on paragraphs 13, 14 and 15A of Schedule 13. The purpose of this modification is to keep the deduction in section 1092 within the European Union limit on state aid. “Larger SME” is defined in section 1121.
Section 1094: Relief only available to SME where company is going concern
2845.This section sets out a precondition for relief under sections 1087 and 1092. It is based on paragraph 18A of Schedule 13 to FA 2002.
Section 1095: Elections under section 1092
2846.This section gives the procedure for making an election under section 1092. It is based on paragraph 15 of Schedule 13 to FA 2002.
Section 1096: Treatment of deemed trading loss under section 1092
2847.This section imposes a restriction on the use of the trade loss and explains how any unused loss is to be dealt with. It is based on paragraph 15 of Schedule 13 to FA 2002.
2848.The section is identical in effect to section 1048.
Section 1097: R&D threshold
2849.This section gives the minimum amount of expenditure that a company must incur in an accounting period to claim relief under this Chapter. It is based on paragraph 1 of Schedule 13 to FA 2002.
2850.The minimum amount of expenditure is £10,000, reduced proportionately if the accounting period is less than 12 months long. As in section 1050, the source legislation does not explicitly state how the reduction is done. Subsection (2) removes any uncertainty by prescribing the arithmetic formula to be used. See Change 78 in Annex 1.
Section 1098: Meaning of “qualifying Chapter 7 expenditure”
2851.This section identifies the three categories of expenditure which qualify for relief. It is based on paragraph 2 of Schedule 13 to FA 2002.
Section 1099: SMEs: qualifying expenditure “for” an accounting period
2852.This section explains how qualifying expenditure is allocated to the accounting periods of a small or medium-sized enterprise. It is based on paragraph 2 of Schedule 13 to FA 2002.
2853.Subsection (2) suspends the normal operation of section 61 in Part 3 for pre-trading expenditure. Pre-trading expenditure is not treated as incurred on the first day of trading. Instead subsection (1)(b) treats the expenditure as incurred for an accounting period if it would have been deductible in calculating the trade profits for that period if the company had been trading.
2854.Relief is available for pre-trading expenditure not just under section 1092 but also under the main rule in section 1089 if it can be deducted in calculating the profits of a trade.
Section 1100: Large companies: qualifying expenditure “for” an accounting period
2855.This section explains how qualifying expenditure is allocated to the accounting periods of a large company. It is based on paragraph 2 of Schedule 13 to FA 2002.
2856.Subsection (1) deals with in-house direct research and development and contracted out research and development. Expenditure is incurred for an accounting period if it is deductible in calculating the trade profits for that period. Unlike small or medium-sized enterprises the normal rules for pre-trading expenditure in section 61 in Part 3 apply (see subsection (2)). Any pre-trading expenditure will be treated as incurred the day the company starts trading.
Section 1101: Qualifying expenditure on in-house direct R&D
2857.This section defines “qualifying expenditure on in-house direct research and development”. It is based on paragraph 3 of Schedule 13 to FA 2002.
2858.“In-house direct research and development” is the term this Act uses to describe research and development that is undertaken directly by the company.
2859.Subsections (2) and (3) rewrite sub-paragraphs (2) and (3) of paragraph 3 of Schedule 13 to FA 2002 which refer to the expenditure being on qualifying R&D activity. This section refers to the expenditure being attributable to qualifying R&D activity in order to align the language with that in Chapters 2 to 5 of this Part.
2860.Paragraph 3(3) of Schedule 20 to FA 2000 and paragraphs 4(4) and 9(3) of Schedule 12 to FA 2002 all require that the qualifying expenditure is attributable to relevant research and development. The provisions that define particular classes of expenditure have rules for determining if the expenditure is attributable to relevant research and development.
2861.Paragraph 3(3) of Schedule 13 to FA 2002 requires that the “qualifying R&D activity on which the expenditure is incurred is relevant research and development in relation to the company”. This test is the same as requiring the expenditure to be attributable to relevant research and development and the section adopts the language of the earlier Chapters.
2862.The section does not reproduce the condition in paragraph 3(4) of Schedule 13 to FA 2002 that the expenditure is not of a capital nature. This is not necessary as section 53 in Part 3 (trading income) already prohibits a deduction for capital expenditure.
Section 1102: Qualifying expenditure on contracted out R&D
2863.This section defines “qualifying expenditure on contracted out research and development”. It is based on paragraphs 6 and 7 of Schedule 13 to FA 2002.
2864.The section covers payments to a sub-contractor. The conditions in the section have to be satisfied but it also necessary to isolate the sub-contractor element of the payment. This is described in sections 1134 to 1136.
2865.Subsections (3) and (4) also refer to the expenditure being attributable to qualifying R&D activity. See the commentary on section 1101.
2866.The section does not reproduce the condition in paragraph 7(5) of Schedule 13 to FA 2002 that the expenditure is not of a capital nature. This is not necessary as section 53 in Part 3 (trading income) already prohibits a deduction for capital expenditure.
Section 1103: Entitlement to and payment of tax credit
2867.This section allows a small or medium-sized enterprise to claim an R&D tax credit. It is based on paragraphs 16 and 18 of Schedule 13 to FA 2002.
2868.The section clarifies that a company may make part claims (subsection (2)).
Section 1104: Meaning of “Chapter 7 surrenderable loss”
2869.This section defines “Chapter 7 surrenderable loss”. It is based on paragraph 16 of Schedule 13 to FA 2002.
2870.The section follows the same pattern as section 1055 (meaning of “Chapter 2 surrenderable loss”) but the restriction in subsection (2) if the claim is made by a trading company is slightly different.
2871.Section 1055(2)(b) gives relief both for the additional deduction and for the underlying expenditure. Subsection (2) denies relief for the underlying expenditure. This is because if the company has had relief under Chapter 2 it will already have had relief for the underlying expenditure in making an R&D tax credit claim under section 1055.
Section 1105: Amount of trading loss which is “unrelieved”
2872.This section lists the other ways in which a company may get relief for the loss. It is based on paragraph 16 of Schedule 13.
Section 1106: Tax credit only available where company is going concern
2873.This section sets out a precondition for relief under section 1103. It is based on paragraph 18A of Schedule 13 to FA 2002.
Section 1107: Amount of tax credit
2874.This section gives the amount of the R&D tax credit. It is based on paragraph 17 of Schedule 13 to FA 2002.
Section 1108: Total amount of company’s PAYE and NIC liabilities
2875.This section explains how to calculate the total amount of a company’s PAYE and NIC liabilities. It is based on paragraph 17 of Schedule 13 to FA 2002.
Section 1109: Payment of tax credit
2876.This section explains the circumstances in which the payment of an R&D tax credit can be withheld or set against arrears of corporation tax. It is based on paragraph 18 of Schedule 13 to FA 2002.
Section 1110: Tax credit payment not income of company
2877.This section makes clear that a payment of an R&D tax credit is not income of the company for tax purposes. It is based on paragraph 20 of Schedule 13 to FA 2002.
Section 1111: Restriction on losses carried forward where tax credit claimed
2878.This section provides that any losses that are surrendered in return for an R&D tax credit are not available for carry forward. It is based on paragraph 19 of Schedule 13 to FA 2002.
Section 1112: Artificially inflated claims for relief or tax credit
2879.This section denies relief for transactions that are intended to increase artificially the amount of relief or R&D tax credit. It is based on paragraph 24 of Schedule 13 to FA 2002.
